Teen apparel retailer Abercrombie & Fitch (NYSE:ANF) raised its full year guidance last month after it reported better-than-expected sales during the holiday season backed by strong online growth. While the company’s comparable store sales declined in high double-digits during the first three quarters of fiscal 2013, they declined by just 6% during the holiday season. [1] This is a promising sign given that there was a sharp decline in its store traffic during November and December, due to bad weather and weak consumer confidence. As U.S. buyers stayed away from stores, they bought more online which complemented Abercrombie’s e-commerce growth. Store visits remained sluggish even in January due to extreme cold, which might have boosted online shopping. With this in mind, we believe that Abercrombie will post better results in Q4 with the earnings release, which is expected on the 26th.

A while back, the company made some changes to its corporate governance structure following pressure from activist investor Engaged Capital LLC. However, the investor wasn’t satisfied with this change and it recently nominated five candidates to Abercrombie’s board. [2] In response, the company stated that it will assess these nominations and take further steps accordingly. During the earnings call, we’ll look for updates on this front along with Abercrombie’s deal with First Insight Inc.

Due to the impact of increased taxes, slow job growth, changing spending patterns, higher healthcare costs and gasoline prices, U.S. buyers spent cautiously last year. This was clearly visible in the holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 17.7% in December 2013 as compared to the same month last year. [3] Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline. [4] [5] Moreover, while U.S. buyers spent freely on electronics, furniture and building materials, they were hesitant to spend on clothing. According to a Reuters poll conducted before the holiday season, about 27% of consumers were planning to lower their spending on apparel this holiday season. [6]

In January, the retail growth failed to pick up as consumer confidence slipped and the U.S. witnessed record cold and heavy snowfall that prevented store visits. The Thompson Reuters/University of Michigan’s consumer sentiment index fell to 81.2 in January from 82.5 in the previous month. [7] As a result, there was intense competition in the apparel industry to capture a sizable share of the low U.S. consumer spending during the fourth quarter. This can weigh heavily on Abercrombie’s sales.

Online Growth Can Help

While store traffic was substantially down as compared to last year, holiday retail sales in the U.S. managed a modest growth of 2.7% primarily driven by a surge in online orders. This is evident from the fact that United Parcel Service (NYSE:UPS), which is one of the biggest players in retail e-commerce delivery, struggled to ship orders before Christmas. [8]. Retailers who manage to attract significant web traffic enjoyed this trend, while those who don’t, struggled.

Although e-commerce isn’t the biggest business for Abercrombie, it did help the company offset the impact of low store traffic. The retailer’s direct-to-consumer sales increased by 25% during the months of November and December. Interestingly, total online sales accounted for 25% of Abercrombie’s revenues in December, while this figure is usually around 16%. [9]. This is a very encouraging scenario for the company that can add some life to its fourth quarter results. Although Abercrombie’s Q4 revenue growth will be far from positive, we expect the rate of sales decline to be lower than what the company witnessed in previous quarters.

Engaged Capital Keeps Pressing Abercrombie

Activist investor Engaged Capital, which holds about 0.5% stake in the company, has been urging Abercrombie to take some big steps towards its business’s revival. Last year, it advised the retailer not to renew its CEO Mike Jeffries’ contract, stating that he was responsible for Abercrombie’s declining sales, failed strategies and bad PR.

In response, the company took away chairman responsibilities from Jeffries and added three new members to its board, bringing the total member count to 12. Although Engaged Capital supported this move, it believes that the new members might not be able to have any meaningful influence over the board’s decisions considering that they are few in number. Therefore, Engaged Capital has nominated five new candidates to Abercrombie’s board. [2] However, it still remains to be seen if the retailer considers any further changes in its governance based of Engaged Capital’s suggestion. We might get a clearer picture during Abercrombie’s Q4 fiscal 2013 earnings call.

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